US jobless claims signal ‘atypical shift’

Oksana Patron

14 June 2023

A growing number of jobless claims in the US, with a bigger share of higher income cohorts, points to further weakness and a potentially bigger drop in consumption in the back half of the year, according to ClearBridge Investments.

The data from the last three months has showed that jobless claims tended to shift substantially toward middle- and upper-income cohorts while claims filed by the lower-income cohorts have declined.

Jeffrey Schulze, director and the head of economic and market strategy at ClearBridge Investments has described this dynamic as atypical but “not out of sync with headline job losses concentrated in the typically higher-paying technology and financial sectors”.

“Given this unique shift toward higher earners losing their jobs, consumption may witness a bigger drop than expected later in 2023, given the current pickup in jobless claims,” he noted.

Following this, there were also ‘other cracks’ beneath the surface which included other labour market data such as a declining quits rate, weakening Conference Board job sentiment and a negative trend in hours worked.

According to ClearBridge’s director, these data sets tended to deteriorate ahead of the broader labour market.

Schulze said that with only modest progress toward loosening labour pressures, the Fed was likely to maintain interest rates at a higher level for longer than financial markets are currently pricing in.

“The US Federal Reserve is likely to maintain interest rates at a higher level for longer than investors appreciate,” he added.

“While inflation has slowed, it remains far too high for comfort. Slowing the labour market to reduce wage gains and thus consumption will take time but should ultimately help bring inflation back down to target.

“Progress is being made, but more work is needed to tame price pressures.”

However, what it meant for equity investors is that discount rates may continue to rise or not drop as rapidly as expected, potentially pressuring valuations.

“Market pricing for monetary policy in the coming months appears to be converging toward the Fed’s expectations, which are for higher interest rates, however a divergence still exists. This lends us to continue to favour tilts toward stocks with defensive characteristics,” Schulze added.